Russian Admits Economy in Crisis as Ukraine Weighs

MOSCOW —
Russia's government acknowledged for the first time on Monday that the economy was in crisis, undermining earlier attempts by officials to suggest albeit weakening growth could weather sanctions over Ukraine.

Moscow markets wait to see the full scale of western measures over the seizure of Ukraine's Crimea and support of its referendum to join Russia, after losing billions of dollars in recent weeks in state and corporate money.

For weeks, Russian officials have said the confrontation between Moscow and the West over Ukraine that threatens economic sanctions and asset freezes would “weigh on the economy”.

Although not speaking directly about the impact from the conflict, Deputy Economy Minister Sergei Belyakov said on Monday the economy was in trouble.

“The economic situation shows clear signs of a crisis,” Belyakov told a local business conference.

European officials have said they are determined to hit Russia for its actions in Crimea, imposing sanctions including travel bans and asset freezes on those responsible. The United States is expected to take similar steps on Monday .

“People are most afraid of sanctions. Their volume and .. what sanctions there will be and how this will be reflected on the Russian financial system, the economy, the markets and the largest companies,” said Konstantin Chernyshev, head or research at Uralsib in Moscow.

Many economists expect Russia to enter recession and most have rushed to slash their growth forecasts as a result of the worst showdown between Russia and the West since the fall of the Berlin Wall.

“Domestic demand is set to halt on the uncertainty shock and tighter financial conditions, likely dipping the economy into a recession over second and third quarter of 2014,” Vladimir Kolychev and Daria Isakova, economists are VTB Capital wrote in a note on Monday.

“We are lowering our full-year growth outlook to 0.0 percent, and see downside risks if uncertainty remains elevated for a protracted period and/or severe sanctions are imposed.”

The Economy Ministry's most recent estimates, issued before the escalation of the Ukrainian crisis, envisage the economy expanding by around 2 percent this year.

Hefty price for political whims

Economist have warned ever since President Vladimir Putin declared on March 3 a right to invade Ukraine to defend the Russian-speaking population that the price Moscow will pay for its decisions will be hefty.

The rouble-denominated MICEX index has lost more than $66 billion in market capitalisation and the central bank has spent more than $16 billion of its reserves to defend the rouble. Only last week, MICEX lost 7.6 percent and the dollar-denominated RTS more than 8 percent.

In a matter of a few weeks Russia has gone from being perceived as one of the more resilient emerging markets to the withdrawal of the United States monetary stimulus to one of the most vulnerable developing countries, analysts said.

“Russia's economy was struggling even before the recent rise in geopolitical tensions surrounding Ukraine and some softer economic data from China,” said Alexander Morozov, chief Russia economist at HSBC in Moscow. “Possible economic and financial sanctions on Russia add to the uncertainties.”

President Vladimir Putin has said Russia will respect the decision of the peninsula's people and the country's two houses of parliament said they would work as quickly as possible to pass legislation for its accession.

Putin is due to address the parliament on Tuesday in what is broadly expected to be an official recognition of Crimea's appeal to include the region into Russian territory.

Capital has been fleeing Russia in billions since the start of the year. Former Finance Minister Alexei Kudrin and a series of economists see capital flight at $50 billion in the first quarter, compared to $63 billion seen in the whole of 2013.

The rouble is down 11 percent against the dollar this year , continuously breaking through all-time lows.

The Russian central bank vowed on Friday to provide for financial stability after the standoff with the West over Crimea, after unexpectedly raising key rates by 150 basis points in early March to stem capital flight.

The bank, in possession of the world's third-largest stash of gold and foreign reserves, which stand at $494 billion, has some room for maneuver. But if the tensions in Ukraine escalate, the bank may burn through the reserves quickly.

“It has become patently clear over the last several days that the Crimean peninsula is the prelude to wider and much more dangerous geo-political tensions over the fate of the Ukrainian mainland,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London said in a note.